Ch 18

Fundamentals of Business Law

Summarized Cases, 8th Ed., and Excerpted Cases, 2nd Ed.

ROGER LeROY MILLER Institute for University Studies Arlington, Texas

GAYLORD A. JENTZ Herbert D. Kelleher Emeritus Professor in Business Law University of Texas at Austin

Learning Objectives • What requirements must an instrument meet to be negotiable? • What are the requirements for attaining the status of a holder in due course (HDC)?

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Learning Objectives • Certain defenses are valid against all holders, including HDC’s. What are these defenses called? Name four defenses that fall within this category. • Certain defenses can be used to avoid payment to an ordinary holder but are not effective against an HDC. What are these defenses called? Name four defenses that fall within this category. Copyright © 2010 South-Western

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Articles 3 and 4 of the UCC • A “negotiable instrument” is a signed writing containing an unconditional promise to pay an exact sum of money. • History of negotiable instruments began in England “bills of exchange” so that merchants were able to exchange money while keeping their money safe in the banks. Copyright © 2010 South-Western

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Amendments to Articles 3 & 4 • 1990 Revisions are incorporated into the text content. • 2002 Revisions updated UCC with regard to e-commerce and UETA. – The term “Record” now replaces “Writing.” – Other updates related to telephone transactions.

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Drafts and Checks • Draft is Unconditional Order to Pay involving Three Parties: – Drawer (Customer), Drawee (Bank) and Payee.

• Time Drafts and Sight Drafts. – Time: payable at a future time. – Sight: payable on sight (on demand).

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Drafts and Checks • Trade acceptances: Seller is drawer and Payee. • Checks (cashier’s, teller’s and traveler’s) are drafts on a bank.

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Time Draft

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Promissory Notes and CD’s • Promissory Notes are PROMISES to pay. • Two party instruments: – Maker (Promisor) and – Bearer (Promisee).

• Certificates of deposit (CDs): two party instruments.

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Promissory Note

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CD

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Requirements for Negotiability • (1) Writing signed by the maker or the drawer. • (2) Unconditional promise or order to pay • (3) A fixed amount of money. • (4) Payable on demand or at a definite time. – CASE 18.1 Foundation Property Investments, LLC v. CTP, LLC (Kansas, 2007).

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Factors That Do Not Affect Negotiability • Undated checks. • Pre or Post-Dating Checks. • Handwritten Terms. – Outweigh typed or printed terms.

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Transfer of Instruments • By Assignment. – Transferee is an Assignee.

• By Negotiation. – Transfer in which the transferee becomes a holder. • Negotiating Order Instruments. • Negotiating Bearer Instruments.

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Holder in Due Course (HDC) • A holder (assignee) is generally subject to the same defenses that the assignor is subject to. • A holder in due course (HDC) takes the instrument FREE of most of the defenses and claims that could be asserted against the transferor.

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Requirements for HDC Status • Taking For Value:

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Requirements for HDC Status • Take in Good Faith (honesty in fact). • CASE 18.2 Georg v. Metro Fixtures Contractors, Inc. (Colorado, 2008).

• Taking Without Notice (of any defect).

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Holder Through an HDC • The “Shelter” Principle: Holder, who does not qualify as an HDC, can acquire the rights and privileges of an HDC. – Depends upon whether holder can ‘trace’ her title back to HDC.

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Signature Liability • Every party who signs a negotiable instrument is either primarily or secondarily liable for payment. – Primary Liability (only makers and acceptors are primarily liable). – Secondary Liability (contingent liability): • Proper and Timely Presentment. • Dishonor. • Proper Notice. Copyright © 2010 South-Western

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Proper Presentment

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Signature Liability • Unauthorized Signatures. – If authorized, can bind the principal. – If unauthorized (forgery) signature is void.

• Unauthorized Indorsements. – Imposter Rule. – Fictitious Payee Rule.

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Warranty Liability • Transferors make certain implied warranties on instruments they are transferring: Transfer and Presentment. • Transfer Warranties (if consideration): – – – – –

Transferor has the right to enforce the instrument All signatures are authentic and authorized Instrument has not been altered. Instrument is not subject to a defense or claim. Transferor has no knowledge of insolvency.

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Warranty Liability • Presentment Warranties protect the person to whom the instrument is presented: – Person obtaining payment has the right to enforce the instrument. – Instrument has not been altered. – Person accepting has no knowledge that instrument is unauthorized.

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Defenses Against Liability • Universal (Real) Defenses to Avoid Liability by ALL Holders, including HDC: – Forgery. – Fraud in the Execution. – Material Alteration. • CASE 18.3 Keesling v. T.E.K. Partners, LLC (Indiana, 2007). – Discharge in Bankruptcy. Copyright © 2010 South-Western

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Defenses Against Liability • Universal (Real) Defenses (Cont’d): – Infancy (Minor). – Illegality. – Mental Incapacity. – Extreme Duress.

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Defenses Against Liability

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Personal Defenses • Personal (limited ) Defenses (only holders, not HDC’s): – Breach of Contract or Warranty. – Lack or Failure of Consideration. – Fraud in the Inducement. – Illegality (voidable). – Mental Incapacity. – Discharge by Payment/Non-Delivery. Copyright © 2010 South-Western

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Discharge From Liability • All parties are liable when primary party pays the holder the amount in full. • Intentional cancellation discharges the liability of all parties. • Can occur when right of recourse is impaired.

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